Business Context and Reporting Period
Company: Grow Biz International, Inc. (Note: Input metadata listed "WINMARK CORP", but the filing text identifies the registrant as Grow Biz International, Inc.)
Reporting Period: Fiscal year ended December 28, 1996.
Business Model: A franchise company operating five retail concepts (Play It Again Sports, Once Upon A Child, Computer Renaissance, Music Go Round, and Disc Go Round) that buy, sell, trade, and consign used and new merchandise. The company generates revenue through franchise fees, royalties, and merchandise sales via a centralized buying group and corporate-owned stores.
Key Financial Metrics
| Metric | 1996 | 1995 |
|---|---|---|
| Total Revenue | $91.55 million | $100.21 million |
| Net Income | $2.59 million | $2.03 million |
| Net Income Per Share | $0.40 | $0.28 |
| Operating Income | $4.06 million | $3.04 million |
| Operating Margin | 4.4% | 3.1% |
| Cash and Equivalents (End of Period) | $1.39 million | $0.10 million |
| Total Debt | $0.26 million | $0.42 million |
| Working Capital | $8.52 million | $11.07 million |
| Return on Average Equity | 13.3% | 9.5% |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 8.6% to $91.55 million, primarily driven by a 19.9% drop in buying group sales ($58.4 million vs. $73.0 million) as franchisees shifted to sourcing new products directly from suppliers.
- Profitability Increase: Despite lower revenue, Net Income increased 27.5% to $2.59 million. Operating income rose 33.4% to $4.06 million due to improved margins and cost management.
- Cost Structure: Cost of merchandise sold decreased 16.2% to $63.9 million. Selling, general, and administrative (SG&A) expenses increased 12.7% to $23.6 million, rising as a percentage of revenue from 20.9% to 25.9% due to the revenue decline.
- Store Growth: The total number of franchised and corporate stores increased from 965 to 1,150 open stores, with 224 new stores awarded during the year.
- Share Repurchases: The company repurchased 740,194 shares of common stock in 1996 for approximately $6.3 million, reducing the share count and increasing earnings per share.
Outlook, Risks, and Management Commentary
- Strategic Shift: Management notes that buying group sales are expected to remain consistent with 1996 levels as the company continues to support franchisees with new product sourcing while franchisees increasingly buy directly from vendors.
- Liquidity: The company ended the year with $1.4 million in cash and a $5.0 million committed revolving line of credit (unused). Management believes current resources are adequate for operations.
- Legal Contingency: The company is defending a lawsuit filed in 1995 by an early partner alleging breach of contract and RICO violations. Management believes the suit is without merit and will not have a material adverse effect.
- Seasonality: Sales volume is typically higher in the spring and during back-to-school and holiday seasons, impacting royalty and merchandise revenue in the second, third, and fourth quarters.
Investor Verification Checklist
- Revenue Mix Sustainability: Verify the long-term impact of franchisees bypassing the centralized buying group on future revenue stability.
- Comparable Store Sales: Review the variance in comparable store sales growth across the five concepts (ranging from -0.6% for Play It Again Sports to 31.4% for Computer Renaissance).
- Share Repurchase Impact: Assess the effect of the $6.3 million stock buyback on future capital availability for expansion or acquisitions.
- Debt Covenants: Confirm the terms of the $5.0 million revolving credit line due for renewal in July 1997.
- Legal Exposure: Monitor the status of the pending RICO-related litigation to ensure no material damages are awarded.